US Gains the Edge Over Global Markets

Janet Brown,editor and publisher of No-Load Fund*X, says US markets have recovered strongly from the recent correction and trailed only China in August's rebound.

US markets withstood August's tumult and managed to halt a two-month losing streak. An uncommonly volatile August ended with the NASDAQ Composite index ahead nearly 2%, while the Dow Jones Industrial Average gained 1.1% and the Standard & Poor's 500 [rose] 1.3%.

It's been a wild ride from mid-July highs for the S&P 500 to a swift 12% drop by mid-August and then half-way back again. Since hitting an all-time high July 19th, the S&P 500 has been up or down at least 1% on the majority of trading days.

We suggest it's far more productive to ignore daily, weekly, and even monthly volatility, and instead focus on the longer term.

Many investors choose to forget that "corrections"-defined as a loss of 10% or more, but less than the 20% bear market-are part and parcel of normal market action. The S&P 500 has experienced a 10% correction 87 times since 1928. That works out to slightly more than one a year for the past 79 years, according to Ned Davis Research.

As to what happens next, the pendulum seems to be swinging back to more emphasis on fundamental investing. Investors are going for solid profits, favoring larger companies with strong balance sheets, and moving towards growth companies with strong earnings.

So far this year the growth portion of all major indices is far ahead of the value components. As a group, growth funds outperformed value again last month in all size categories. Technology funds again led last month and are one of the strongest domestic categories for the past 12 months, following only telecom and natural resources.

Despite the fact that the recent upheaval was triggered by events in the US markets (the subprime lending fiasco), domestic funds have actually held up better than their international counterparts. Overseas markets generally lagged our own in August, with only China region funds bringing in stronger gains. China's benchmark Shanghai Index topped 5000 for the first time and so far this year [is] the world's best-performing index.

Funds concentrated in Asia held up better than those focused in Europe, possibly because Asian corporations generally have limited debt and Asian nations sit on huge piles of currency reserves. US bond market woes have far greater influence on European companies.

Diversified emerging markets funds weathered the storm relatively well, contrary to expectations based on previous global sell-offs. Emerging markets came of age in the 1990s and they also came to signify volatility and vulnerability for investors around the world. Their recent resilience points to positive fundamentals of their maturing economies and the strong global expansion.